A reasonable explanation: What ‘reason codes’ tell you about your credit score

Consumer knowledge about credit scoring remains a challenge. In fact, nearly half of Americans still don’t know that mortgage companies use credit scores when making decisions about credit availability and pricing, according to a 2013 survey by the Consumer Federation of America and VantageScore Solutions, a credit score model developer. Even if you do understand the importance of a credit score, you may still wonder why yours isn’t higher.

That’s where “reason codes” come in handy.

Reason codes – also called score factors or adverse action codes – address factors that may be impacting your credit score, such as high balances on revolving credit accounts, late payments or a short credit history.

“Many people only review their credit score when they’re applying for or have been refused new credit,” says Barrett Burns, president and CEO of VantageScore Solutions. “Credit score notices, often sent after consumers apply for credit, include ‘reason codes’ – numbers and phrases that appear along with the score to explain why the score isn’t higher. If you’re unfamiliar with what those reason codes mean, the information intended to help you better understand your score may actually have the opposite effect.”

You’ll see reason codes on your credit score notice, regardless of whether your score is really good, average or poor, because the reason codes are meant to explain why your score isn’t even higher. While they don’t directly account for a lender’s credit decisions, understanding reason codes can help you better manage your credit accounts and improve your credit score.

To help with that, VantageScore Solutions created a new consumer education website, ReasonCode.org, which provides a wealth of information about reason codes. The website includes a search engine that allows you to enter the reason codes that appear on your credit score notice and obtain more detailed information about each code in plain English and tips for improving your credit score.

VantageScore Solutions surveyed more than 200 lenders nationwide about reason codes and found that only 10 percent of lenders said their customers “understand reason codes well.” To help you understand reason codes, here are some important consumer questions and answers:

Q. What is a “reason code” and why does it appear on my credit score notice?

A. Reason codes are alpha numeric codes (e.g. 01, AA) combined with short descriptions intended to explain why your credit score is not higher. Reason codes clarify why you did not receive a “perfect” credit score on a particular scoring model. Since perfect scores are rare, your score could always be higher, even when it’s very good, so you’ll always have reason codes associated with your score.

Q. Why should I care about reason codes?

A. If your score could be better, you can use reason codes as a guide to understand what you need to do to improve it. For example, if you receive a reason code that points to a high balance on your credit cards as a reason your score is lower then paying down those balances may lead to an improved score.

Q. Which code has the most influence on my score?

A. Reason codes are always listed in the order of greatest impact. Keep in mind just about all consumers will receive reason codes – even if a score is nearly perfect. If your score is already very high you may not need to take any action.

Reason codes can be a map for you to follow on the road to a higher credit score. Read and research them carefully and become a better manager of credit. The result can quite literally be more money in your pocket.

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